Learn About Home Mortgage Financing
20% cash down payment ready at-hand. One of the first things potential homeowners will find out about purchasing a house is the plethora of financing options available. In order to understand which option for home mortgage financing best suits you, you ultimately need to find a balance between your current financial position and the lowest interest rate that lenders are willing to quote given your current financial position.
It is important to remember not to "jump the gun" at the first bank willing to lend you financing for your home mortgage. You should always shop around because a small variation in an interest rate percentage could mean the difference in thousands of dollars out of your pocket. Just like no two parcels of land are alike, no two lenders are alike. To help you begin conducting your research, you should first understand the different features of a typical loan.
Interest Rate Information For Home Mortgage Financing
Determine which interest rate best fits your personal finance situation. The most popular loans are Straight-Line (Amortized) Loans, Fixed Loans, and Balloon Loans. There are even loans with negative amortizing characteristics.
Straight-Line Loans are one of the most general and common kinds of loans. They have a periodic unchanging payment, part of which goes to interest and part of which goes to the principal.
Fixed Loans have a fixed interest rate until the principal has been paid in totality.
Balloon Loans are like a Fixed Loan in the beginning stages, then once an agreed upon year arises; the remaining lump sum is then due (hence the name "Balloon"). Sometimes the option is available to obtain a loan with more than one type of loan feature. For example, a fixed rate of 5% for the first ten years, then a fixed rate of 6.5% for the remaining life of the loan. Don't hesitate to ask any mortgage lenders you meet with if they will customize a loan for you.
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Finding a Lender For Home Mortgage Financing
- Basic loan – the buyer obtains a loan from their bank to make a large, lump sum payment where the buyer makes payments to the bank over the remaining term of the loan.
- Third party financing – a bank or other institution buys the house and the buyer then pays mortgage payments to bank.
- Seller Financing – this is the case in which the seller has paid off the home and the buyer then makes payments to the seller (of course, with interest).
- Assumption – the buyer simply "assumes" the seller's loan by taking over their payments.
A good way to find a low interest rate is to start contacting commercial banks (usually issue short-term loans) and mortgage companies since they are the most traditional sources of home mortgage financing. Any mortgage lending institution will be able to provide you with the loan options and eligibility requirements such as credit unions, insurance companies, and thrift institutions (i.e., savings banks, loan and savings associations) also lend to help new owners finance their mortgage.
Documentation of Ownership Needed in Home Mortgage Financing
Real estate deed: The institution lending you credit wants to be sure you are the new rightful homeowner that you claim to be. This deed states the dates in which the title was transferred from the seller to you (the buyer) at closing.
Ownership of other assets: The lender wants to be confident that even if you are unable to make the payments in entirety, they will still be compensated. Essentially, you are saying, "If I fail to make the payments in full and on time, you may revoke this other asset that I own." In order to offer collateral, you must first prove that you are the rightful owner of the asset. Any buyer must have documented proof of ownership for an asset big enough to act as collateral (e.g. savings account statement, car title, real estate deed for some other property, equipment).
It is typical for a buyer to be asked to sign a Deed of Trust that would allow the lender to foreclose or repossess the buyer's new property if the loan is not repaid. The lender may instead choose to put a lien on your home to secure your repayment of debt (in which you would sign a Real Estate Lien (Promissory)
Debt Services: Be prepared to list all principal and interest amounts that you owe to any other person(s) or institution(s). The lender will use this information to evaluate your long-term solvency so they may be certain that you have the ability to satisfy your long-term obligations.
Loan Fees in Home Mortgage Financing
Interest isn't the only thing the lender will earn when you choose home mortgage financing through their institution. You can expect the lender to add fees like a Loan Origination Fee (fee to begin loan process that is usually between .5% and 2% of the principal amount) or a Discount Fee (usually occurs when you lower the interest rate).
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